Oi’s Industry-Best Dividend Yield in Jeopardy: Corporate Brazil

Oi is spending about 6 billion reais this year on infrastructure improvements, the most among peers, to better satisfy customers after getting more complaints from Brazilians than any other phone company. Photographer: Paulo Fridman/Bloomberg

June 20 (Bloomberg) -- Oi SA is in jeopardy of falling
short on a pledge to deliver 2 billion reais ($920 million) in
dividends this year, a payout that was forecast to make it the
highest-yielding phone company in the world.

Brazil’s largest landline carrier promised to pay 1 billion
reais in August as long as it closes this quarter with a net-debt-to-earnings ratio of less than 3, down from 3.05 in March.
With June drawing to a close, the Rio de Janeiro-based company
needs help from regulators, who must approve a deal to sell
access to phone towers, adding 1 billion reais to Oi’s coffers.

Oi is spending about 6 billion reais this year on
infrastructure improvements, the most among peers, to better
satisfy customers after getting more complaints from Brazilians
than any other phone company. Even with those expenses, new
Chief Executive Officer Zeinal Bava faces pressure to supply a
steady stream of cash to Oi’s controlling shareholders so they
can pay off their own debt.

“They keep sucking and sucking the company dry,” said
Eduardo Roche, head of equities at Rio de Janeiro-based Modal
Asset Management, which manages 600 million reais. “The
dividend isn’t necessary -- it’s necessary for the controller.
For investors, it’s more interesting for the company to create
value.”

Management Changes

Oi has fallen 50 percent in Sao Paulo trading since firing
Chief Executive Officer Francisco Valim on Jan. 22. The company
rallied 17 percent on June 4 when Bava, a veteran of majority
shareholder Portugal Telecom SGPS SA, was named as Valim’s
replacement. The shares rose 3.4 percent to 3.98 reais at the
close today.

The company said today in a regulatory filing that Chief
Financial Officer Alex Zornig left and will be replaced on
interim basis by Bayard Gontijo.

Second-quarter results are not likely to vary much from the
first quarter, when the ratio hit 3.05 and net income dropped 41
percent from a year earlier, Roche said. That makes the sale of
assets such as telecommunications towers key, he said. The
phone-tower access sale is pending approval by the regulatory
agency known as Anatel, which didn’t return phone and e-mail
requests for the status of the process.

An Oi press official who asked not to be named declined to
comment on the company’s dividend policy and the upcoming
payment. Based on analyst estimates compiled by Bloomberg, Oi’s
dividend yield is more than 25, compared with an average of
about 6 for the world’s 100 biggest telecommunications carriers.

The company is insisting on paying dividends and not doing
more to strengthen its liquidity, said Gustavo Serra, an analyst
at Planner Corretora de Valores SA whose rating for Oi is under
review. Even if it gets below 3, Oi’s ratio of net debt to
earnings would far surpass the average of Latin American
telecommunications companies, which is less than 1, according to
data compiled by Bloomberg.

‘Not Sustainable’

“At some point it will have to opt to reduce the dividend
policy or reduce investments,” Serra said in a telephone
interview from Sao Paulo. “The proceeds of the dividend make
the return very attractive, especially if you consider the drop
in the stock, but the market doesn’t see this as very positive
because this type of growth is not sustainable and there is no
sign of reversal.”

Oi has vowed to pay 8 billion reais in dividends between
2012 and 2015, according to its website. Oi’s controlling group,
known as TmarPart, has about 3.5 billion reais in debt and paid
355 million in financial costs last year -- almost exactly the
amount it receives in dividend payments from Oi, according to an
Itau BBA SA note last month.

Reassessing Expectations

TmarPart is a holding company co-owned by Portugal Telecom,
Brazilian pension funds, the Andrade Gutierrez conglomerate and
the Jereissati family. A press official for TmarPart, Andrade
Gutierrez and the Jereissati family didn’t return phone and e-mail requests for comment. A press official for Portugal Telecom
didn’t return an e-mail request for comment.

The risk that Oi will miss this quarter’s debt ratio goal
has analysts reconsidering their expectations. Luis Azevedo and
Tales Freire, analysts from Bradesco BBI SA, cut their estimate
for this year’s dividend payments in half to 1 billion reais,
indicating that the August payment won’t happen at all,
according to a note on June 7.

Oi could also choose to make a smaller payment instead of
completely skipping the August dividend, said Sandra Peres, a
Sao Paulo-based analyst at Coinvalores, in a telephone
interview.

“If the debt ratio passes 3, Oi will still pay, just at a
lower rate,” she said.

New Hope

Bava’s arrival from Lisbon to become Oi’s new leader is
fueling hope for a turnaround by showing the interest Portugal
Telecom has in Brazil as its home market ceases to provide
growth opportunities.

“The new president will put the house in order,” said
Peres, who has a buy rating on Oi based upon its “strong
investment plan.” Peres has a target price of 7 reais on Oi.
“They are investing for a return in the long run.”

It’s best to hold out for Oi to make changes before buying
the shares, said Modal’s Roche.

“With some changes, and redefining the dividend, Oi could
become an attractive company in the long term,” Roche said,
“but we still don’t see a buy opportunity right now.”